Thursday 20 October 2016

It's an age-old riddle: risk, savings or investment?

John Lowe

Published 12/04/2015 | 02:30

'Saving comes naturally to some people, and is extremely difficult for others. Like any skill, the best way to learn it is to practise'
'Saving comes naturally to some people, and is extremely difficult for others. Like any skill, the best way to learn it is to practise'

St Paul was accredited with saying the love of money is the root of all evil. Mark Twain had a problem with this point of view, believing instead that the lack of money is the root of all evil. But until a better system replaces 'money', we are stuck having to save it, so we can spend it.

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The idea of not spending some of your money now, so that you can use it later, is called 'saving'. Okay, okay, I know you know, but it had to be said.

Saving comes naturally to some people, and is extremely difficult for others. Like any skill, the best way to learn it is to practise.

I don't suppose you will find a self-respecting personal finance pundit who would recommend anything other than saving part of any money you receive or earn. To what end? So that you have cash to hand for emergencies, sudden loss of income, major purchases or irregular expenses.

You will also need savings if you want to buy property - 20pc deposits seem an awful long way away.

How big should your savings pot be? Opinions differ. I would say outside of major capital needs, enough to support yourself and your dependants for between three and six months. So that's about three to six months net annual income in a Rainy Day Fund (RDF).

Where should you keep your savings? Where you can get your hands on them quickly - an accessible, on-demand deposit account.

Remember, with savings up to €100,000 per person, you are covered by the Deposit Protection Scheme via the Government via the taxpayer - you and me.

In many instances the terms saving and investment are used interchangeably, however there are major differences between both processes.

The two best savings demand accounts currently are:

• KBC Bank - 1.5pc gross (net 0.885pc after DIRT tax, maximum €100k per person).

• Rabodirect - 1.5pc (for the first € 20,000 and 0.75pc thereafter).

Investments differ from savings in that they represent money you either don't need in a hurry or, if you are a risk-taker, you don't mind losing.

All investments involve risk. This is because either you are giving your money to someone else to make money for you, and so there is always the chance they will turn out to be crooks or idiots (or both); or else you are buying something that may be worth less when you come to sell it.

However, there are lots of investments that aren't really risky. Normally, the more money you stand to make from the money you invest, the higher the risk. As a general rule, if you do invest outside of deposit accounts, you should at least be aiming for double the return of the best deposit account (best 14-month fixed rate is KBC's 1.55pc gross, 0.9145pc net) to justify this decision.

As far as safety and security are concerned, the National Treasury Management Agency's State Savings (available online and through An Post offices), currently offers the best and safest deposit interest rate options - that's if you want to stay in cash:

• National Savings Certificate - 7pc tax free after 5.5 years (equivalent to 2.1pc pa gross each year)

• National Solidarity Bond - 25pc tax free after 10 years (equivalent to 3.83pc pa gross each year)

The National Savings Bond offers a paltry 2.5pc tax free after three years (equivalent to 1.41pc gross each year ) and is really not worth the investment.

If you do invest in any of them, remember to split the amounts so that if you do have to break the term, you will only be penalised on that amount withdrawn (effectively you lose out on the interest). All investments in State Savings are government guaranteed and have a maximum investment threshold of € 120,000 per person.

Start saving now if you haven't already and once your RDF coffers are full, you can then plan an investment strategy to suit your needs. Remember also to open a Regular Saver Account (RSA) to kick-start your savings programme, even if it is only to build up your RDF or just cover the costs of next Christmas. (RSAs allow you to save between €100 and €1,000 per month - no lump sums - with the best deals from Nationwide UK at 4pc on a 15-month saving plan, and KBC Bank 3.5pc for a 12-month saving plan and 4.5pc if you open a current account with them.)

You WILL spend money on birthdays, anniversaries, holidays etc - so why not provide for them? A regular saver account is the ideal vehicle for these expenses. Last month's UK budget introduced a saving scheme similar to our last government-sponsored savings scheme (the SSIA or Special Savings Incentive Account, which closed in 2007) to help the nation save.

We in Ireland don't need an incentive.

If you're not happy with the deposit rates, then there are a number of things you can consider.

You will often hear people describe investment as being a case of "risk versus reward".

What they mean by this is how much risk they want to take for what sort of reward. The key things to remember about investment are that:

• You should diversify. In other words, don't keep all your eggs in one basket but make sure you are spreading the risk by investing in different sectors, asset classes and globally.

• Over the long term, the highest returns have come from the stock market.

Currently we are in the third longest and strongest Bull market (continuously rising market) in history. It just keeps going up - irrespective of global events like Isil, Ebola, Ukraine, pro-democracy riots in Hong Kong and so on.

In fact, it's up over 200pc since March 2009. With the low interest rates likely to stick around for another couple of years and this Bull market set to continue, do you ignore? If you want growth of any kind, you MUST be prepared to take a little risk.

• The majority of your money, say 90pc for most people, should be in relatively low-risk investments, such as the stock market, property, pensions and bonds (a posh word for government and public company IOUs).

There are now many easy-to-operate, simple-to-understand investment vehicles such as managed funds, where you can swap at no cost out of more aggressive funds into safer ones with a phone call. Standard Life's MyFolio funds, Irish Life's Multi Asset Portfolio funds (MAPs) and Zurich's Pathway funds are just three of the best known.

Finally, when it comes to alternative investment options, do not feel compelled to diversify simply because others seem to be making money from their choices.

Remember the wise words of James Goldsmith - if you see a bandwagon, it's too late!

John Lowe is the founder and managing director of Providence Finance Services Ltd trading as Money Doctor. Email him at: or follow him on Twitter @themoneydoc

Glittering prize of gold has history's stamp of approval

Gold is currently valued at about $1,181.40 per troy ounce - a troy ounce is slightly heavier than the avoirdupois weights we grew up with, but there are only 12 troy ounces in a troy pound (it's the best argument for the metric system).

If the most expensive soccer player in the world - Gareth Bale of Real Madrid - was worth his weight in gold, his 74kg weight (2,379.15525 troy ounces) would only be worth €2,578,655 compared with the €90,100,000 Real Madrid paid Spurs!

Put it another way, you could have nearly 35 Gareth Bales in solid 24ct gold on the pitch for the amount of money paid.

Gold reached the dizzy heights of $850 per troy ounce back in 1980. It had never been higher. The market then fell and it took over 27 years just to get back to that $850 level again.

However, in early 2010 it took off, reaching a high in 2011 of nearly $2,000 per troy ounce. Four years later, it's about $1181 per troy ounce. Will it go higher again?

If bought, gold should be part of a diversified long- term investment (as all stockmarket investments should be) and secondly, the decision to buy the precious yellow metal should be carefully considered.

They say prudence would dictate that 10pc of your wealth should be in a precious metal. You can buy gold coins, jewellery or shares in gold mines or firms trading in gold. The cheapest way to buy on the stockmarket is through Exchange Traded Funds, like the SPDR Gold Trust ETF, which boasts nearly $28bn in assets under management, or authorised gold agents like Goldcore.

Other methods of purchase are gold certificates where the bullion is stored in a mint and you receive a certificate.

It's not just finance ministers who are buying gold. Central Banks the world over are buying it; Apple uses it in its watches and while there is no income from the metal, there is only a finite amount available - just 170,000 metric tonnes of the stuff - the equivalent of a 68ft sided cube worth $9.6trillion. Convinced?

Sunday Indo Business

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